The robust subprime-laced auto lending market helped drive strong profits at regional banks, now cracks pose a threat to the banks most involved, according to a deep dive into the industry by analysts at Piper Jaffray.

Analysts led by Kevin Barker came away with three conclusions following their deep dive:

(1) auto sales have reached a cyclical peak and a near-term decline is set to cause auto loan balances to contract in the next few years;

(2) Default rates are likely to increase due to relaxed credit standards but the deterioration would ultimately depend on labor conditions, which are currently in great shape;

(3) credit losses are set to move higher due to lower residual values and higher delinquency rates, especially for those lenders exposed to subprime borrowers.

Auto sales in 2015 hit an all-time high of 17.8 million. The firm does not expect this rate to continue given that we are seeing long-term scrappage rates near 12-13M vehicles and demographic trends would only require an additional 2.0-2.5M vehicles, implying long-term sales should trend toward 14-15.5M vehicles. This implies a ~15% decline from current levels.

The firm highlights red flags in subprime. They note subprime auto lenders, such as SC, ALLY, COF, and CPSS, have experienced a significant contraction in their valuations over recent months. Although they have not seen a significant change in default trends for recent vintages, lending to subprime borrowers is near peak levels. The chart below shows loan growth to borrowers with FICO scores below 719 have averaged 15% compared to 9% for borrowers with scores above 720.

Afer several years of solid credit metrics, they have observed increasing delinquency rates and net charge-offs for most banks involved in auto lending. Several large cap regional banks, including STI and CFG, have pulled back from the market citing unattractive risk-adjusted returns.

The firm downgraded BB&T to Underweight today, saying Street estimates appear too high to us due to an aggressive view on margin expansion. In addition, they expect credit losses to be incrementally higher than Street estimates given BBT’s exposure to auto and management guidance for a “normalization” of credit losses to 50-70 bps.